Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o(Do not check if a smallerreporting company)

Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common shares, no par value — 304,823,911 shares issued and outstanding as of October 31, 2012.

On September 28, 2010, Biovail Corporation (“Biovail”) completed the acquisition of Valeant Pharmaceuticals International (“Valeant”) with Valeant surviving as a wholly-owned subsidiary of Biovail (the “Merger”). In connection with the Merger, Biovail was renamed “Valeant Pharmaceuticals International, Inc.” (the “Company”).

Except where the context otherwise requires, all references in this Quarterly Report on Form 10-Q (this “Form 10-Q”) to the “Company”, “we”, “us”, “our” or similar words or phrases are to Valeant Pharmaceuticals International, Inc. and its subsidiaries, taken together, after giving effect to completion of the Merger; references to “Biovail” are to Biovail Corporation prior to the completion of the Merger and “Valeant” are to Valeant Pharmaceuticals International.

In this Form 10-Q, references to “$” and “US$” are to United States (“U.S.”) dollars, references to “C$” are to Canadian dollars, references to “€” are to Euros, references to “AUD$” are to Australian dollars, references to “R$” are to Brazilian real and references to “MXN$” are to Mexican peso.

Forward-Looking Statements

Caution regarding forward-looking information and statements and “Safe-Harbor” statements under the U.S. Private Securities Litigation Reform Act of 1995:

To the extent any statements made in this Form 10-Q contain information that is not historical, these statements are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and may be forward-looking information within the meaning defined under applicable Canadian securities legislation (collectively, “forward-looking statements”).

These forward-looking statements relate to, among other things: the expected benefits of our acquisitions (including the Medicis acquisition) and other transactions, such as cost savings, operating synergies and growth potential of the Company; business plans and prospects, prospective products or product approvals, future performance or results of current and anticipated products; the impact of healthcare reform; exposure to foreign currency exchange rate changes and interest rate changes; the outcome of contingencies, such as certain litigation and regulatory proceedings; general market conditions; and our expectations regarding our financial performance, including revenues, expenses, gross margins, liquidity and income taxes.

Forward-looking statements can generally be identified by the use of words such as “believe”, “anticipate”, “expect”, “intend”, “estimate”, “plan”, “continue”, “will”, “may”, “could”, “would”, “target”, “potential” and other similar expressions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. These forward-looking statements may not be appropriate for other purposes. Although we have indicated above certain of these statements set out herein, all of the statements in this Form 10-Q that contain forward-looking statements are qualified by these cautionary statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, such statements involve risks and uncertainties, and undue reliance should not be placed on such statements. Certain material factors or assumptions are applied in making forward-looking statements, including, but not limited to, factors and assumptions regarding the items outlined above. Actual results may differ materially from those expressed or implied in such statements. Important factors that could cause actual results to differ materially from these expectations include, among other things, the following:

•

our ability to compete against companies that are larger and have greater financial, technical and human resources than we do, as well as other competitive factors, such as technological advances achieved, patents obtained and new products introduced by our competitors;

•

the challenges and difficulties associated with managing the rapid growth of our Company and a large, complex business;

our ability to close transactions (including the Medicis acquisition) on a timely basis or at all;

•

factors relating to the integration of the companies, businesses and products acquired by the Company, such as the time and resources required to integrate such companies, businesses and products, the difficulties associated with such integrations, and the achievement of the anticipated benefits from such integrations;

•

our eligibility for benefits under tax treaties and the continued availability of low effective tax rates for the business profits of certain of our subsidiaries;

•

our future cash flow, our ability to service and repay our existing debt and our ability to raise additional funds, if needed, in light of our current and projected levels of operations, acquisition activity and general economic conditions;

•

our substantial debt and debt service obligations and their impact on our financial condition and results of operations;

•

the uncertainties associated with the acquisition and launch of new products, including, but not limited to, the acceptance and demand for new pharmaceutical products, and the impact of competitive products and pricing;

•

the difficulty in predicting: the expense, timing and outcome within our legal and regulatory environment, including, but not limited to, the U.S. Food and Drug Administration, the Canadian Therapeutic Products Directorate and European, Asian, Brazilian and Australian regulatory approvals; legal and regulatory proceedings and settlements thereof; the protection afforded by our patents and other intellectual and proprietary property; successful generic challenges to our products and infringement; or alleged infringement of the intellectual property of or by others;

•

the success of preclinical and clinical trials for our drug development pipeline or delays in clinical trials that adversely impact the timely commercialization of our pipeline products, which could lead to material impairment charges;

•

the results of management reviews of our research and development portfolio, conducted periodically and in connection with certain acquisitions, the decisions from which could result in terminations of specific projects which, in turn, could lead to material impairment charges;

•

the results of continuing safety and efficacy studies by industry and government agencies;

•

our ability to obtain components, raw materials or bulk or finished products supplied by third parties;

•

the disruption of delivery of our products and the routine flow of manufactured goods;

•

the seasonality of sales of certain of our products;

•

the introduction of products that compete against our products that do not have patent or data exclusivity rights, which products represent a significant portion of our revenues;

•

the risks associated with the international scope of our operations, including our presence in emerging markets and the challenges we face when entering new geographic markets;

•

adverse global economic conditions and credit market uncertainty in European and other countries in which we do business;

•

economic factors over which the Company has no control, including changes in inflation, interest rates, foreign currency rates, and the potential effect of such factors on revenues, expenses and resulting margins;

•

our ability to retain, motivate and recruit executives and other key employees;

•

the outcome of legal proceedings, investigations and regulatory proceedings;

iii

•

the risk that our products could cause, or be alleged to cause, personal injury, leading to withdrawals of products from the market;

•

the impacts of the Patient Protection and Affordable Care Act and the Food and Drug Administration Safety and Innovation Act in the U.S. and other legislative and regulatory reforms in the countries in which we operate; and

•

other risks detailed from time to time in our filings with the U.S. Securities and Exchange Commission (the "SEC”) and the Canadian Securities Administrators (the “CSA”), as well as our ability to anticipate and manage the risks associated with the foregoing.

Additional information about these factors and about the material factors or assumptions underlying such forward-looking statements may be found under Item 1A. of Part II of this Form 10-Q and under Item 1A. “Risk Factors” of the Company’s Annual Report on Form 10-K Item 1A., and in the Company’s other filings with the SEC and CSA. We caution that the foregoing list of important factors that may affect future results is not exhaustive. When relying on our forward-looking statements to make decisions with respect to the Company, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. These forward-looking statements speak only as of the date made. We undertake no obligation to update any of these forward-looking statements to reflect events or circumstances after the date of this Form 10-Q or to reflect actual outcomes.

iv

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

VALEANT PHARMACEUTICALS INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

(All dollar amounts expressed in thousands of U.S. dollars)

(Unaudited)

As of

September 30,

2012

As of

December 31,

2011

Assets

Current assets:

Cash and cash equivalents

$

257,730

$

164,111

Marketable securities

—

6,338

Accounts receivable, net

805,010

569,268

Inventories, net

418,252

355,212

Prepaid expenses and other current assets

72,214

41,884

Assets held for sale

9,925

72,239

Deferred tax assets, net

150,539

148,454

Total current assets

1,713,670

1,357,506

Property, plant and equipment, net

450,327

414,242

Intangible assets, net

8,035,717

7,657,798

Goodwill

3,799,613

3,598,786

Deferred tax assets, net

41,181

54,681

Restricted cash

8,231

—

Other long-term assets, net

97,469

58,700

Total assets

$

14,146,208

$

13,141,713

Liabilities

Current liabilities:

Accounts payable

$

166,688

$

157,620

Accrued liabilities and other current liabilities

634,722

527,583

Acquisition-related contingent consideration

112,274

100,263

Income taxes payable

10,208

10,335

Deferred revenue

18,142

12,783

Current portion of long-term debt

207,688

111,250

Deferred tax liabilities, net

8,786

4,438

Total current liabilities

1,158,508

924,272

Deferred revenue

36,727

38,153

Acquisition-related contingent consideration

392,961

319,821

Long-term debt

7,422,558

6,539,761

Liabilities for uncertain tax positions

99,544

91,098

Deferred tax liabilities, net

1,127,226

1,144,914

Other long-term liabilities

123,502

76,678

Total liabilities

10,361,026

9,134,697

Shareholders’ Equity

Common shares, no par value, unlimited shares authorized, 302,899,442 and

306,371,032 issued and outstanding at September 30, 2012 and December 31, 2011, respectively

5,916,671

5,963,621

Additional paid-in capital

270,183

276,117

Accumulated deficit

(2,281,834

)

(2,030,292

)

Accumulated other comprehensive loss

(119,838

)

(202,430

)

Total shareholders’ equity

3,785,182

4,007,016

Total liabilities and shareholders’ equity

$

14,146,208

$

13,141,713

Commitments and contingencies (note 19)

The accompanying notes are an integral part of these consolidated financial statements.

1

VALEANT PHARMACEUTICALS INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(All dollar amounts expressed in thousands of U.S. dollars, except per share data)

(Unaudited)

Three Months Ended

September 30,

Nine Months Ended

September 30,

2012

2011

2012

2011

Revenues

Product sales

$

856,892

$

570,423

$

2,363,226

$

1,600,879

Alliance and royalty

12,248

22,471

148,348

146,873

Service and other

15,000

7,690

48,759

27,245

884,140

600,584

2,560,333

1,774,997

Expenses

Cost of goods sold (exclusive of amortization of

intangible assets shown separately below)

219,670

162,568

646,395

501,767

Cost of alliance and service revenues

10,582

3,078

105,460

40,418

Selling, general and administrative

188,660

134,801

551,386

423,964

Research and development

19,170

17,476

58,887

48,910

Amortization of intangible assets

218,187

138,027

629,400

365,016

Restructuring, integration and other costs

42,872

15,874

135,213

61,039

Acquired in-process research and development

145,300

—

149,868

4,000

Acquisition-related costs

4,605

9,498

25,977

12,874

Legal settlements

—

—

56,779

2,400

Acquisition-related contingent consideration

5,630

6,904

23,198

9,042

854,676

488,226

2,382,563

1,469,430

Operating income

29,464

112,358

177,770

305,567

Interest income

1,156

1,052

3,299

2,941

Interest expense

(116,042

)

(87,504

)

(318,681

)

(239,328

)

Loss on extinguishment of debt

(2,322

)

(10,315

)

(2,455

)

(33,325

)

Foreign exchange and other

(1,603

)

(3,590

)

18,458

64

(Loss) gain on investments, net

—

(140

)

2,024

22,787

(Loss) income before recovery of income taxes

(89,347

)

11,861

(119,585

)

58,706

Recovery of income taxes

(96,992

)

(29,001

)

(92,702

)

(44,998

)

Net income (loss)

$

7,645

$

40,862

$

(26,883

)

$

103,704

Basic earnings (loss) per share

$

0.03

$

0.13

$

(0.09

)

$

0.34

Diluted earnings (loss) per share

$

0.02

$

0.13

$

(0.09

)

$

0.32

Weighted-average common shares (000s)

Basic

304,075

302,702

305,550

303,285

Diluted

311,743

322,783

305,550

329,010

The accompanying notes are an integral part of these consolidated financial statements.

The accompanying notes are an integral part of these consolidated financial statements.

3

VALEANT PHARMACEUTICALS INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(All dollar amounts expressed in thousands of U.S. dollars)

(Unaudited)

Three Months Ended

September 30,

Nine Months Ended

September 30,

2012

2011

2012

2011

Cash Flows From Operating Activities

Net income (loss)

$

7,645

$

40,862

$

(26,883

)

$

103,704

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Depreciation and amortization

235,311

154,936

672,759

404,214

Amortization of debt discounts and debt issuance costs

8,979

12,685

14,335

19,033

Acquired in-process research and development

145,300

—

149,868

4,000

Acquisition accounting adjustment on inventory sold

6,009

2,768

49,401

48,939

Loss (Gain) on disposal of assets

229

—

10,780

(5,314

)

Acquisition-related contingent consideration

5,630

6,904

23,198

9,042

Allowances for losses on accounts receivable and inventories

6,833

1,740

12,936

4,212

Deferred income taxes

(107,093

)

(38,601

)

(127,802

)

(77,098

)

Additions to accrued legal settlements

—

—

56,779

2,400

Payments of accrued legal settlements

(37,739

)

—

(39,551

)

(16,400

)

Share-based compensation

18,547

17,587

52,855

73,038

Tax benefits from stock options exercised

(2,367

)

(2,042

)

(5,842

)

(33,658

)

Foreign exchange loss (gain)

356

3,611

(21,909

)

(662

)

Gain on sale of marketable securities

—

—

—

(21,316

)

Payment of accreted interest on contingent consideration

(552

)

—

(1,450

)

—

Other

(5,545

)

(9,170

)

(15,109

)

8,543

Changes in operating assets and liabilities:

Accounts receivable

(182,646

)

(43,087

)

(189,249

)

(93,832

)

Inventories

(9,787

)

(5,211

)

(61,300

)

(68

)

Prepaid expenses and other current assets

(6,324

)

(7,813

)

(9,457

)

(2,186

)

Accounts payable, accrued liabilities and other liabilities

84,352

37,618

58,157

37,775

Income taxes payable

(311

)

920

(13,857

)

(13,673

)

Net cash provided by operating activities

166,827

173,707

588,659

450,693

Cash Flows From Investing Activities

Acquisition of businesses, net of cash acquired

(245,367

)

(409,056

)

(972,199

)

(969,323

)

Acquisition of intangible assets

(6,305

)

(12,237

)

(8,865

)

(323,122

)

Purchases of property, plant and equipment

(57,069

)

(9,584

)

(81,786

)

(43,563

)

Proceeds from sales and maturities of marketable securities

—

—

9,412

86,639

Purchases of marketable securities and other investments

—

(11,745

)

(7,200

)

(81,087

)

Proceeds from sale of assets

10,717

—

76,967

36,000

Decrease (increase) in restricted cash

628

—

(8,245

)

—

Net cash used in investing activities

(297,396

)

(442,622

)

(991,916

)

(1,294,456

)

Cash Flows From Financing Activities

Issuance of long-term debt, net of discount

122,295

690,000

1,408,705

2,929,688

Repayments of long-term debt

(31,063

)

(11,088

)

(461,056

)

(986,088

)

Short-term debt borrowings

8,930

—

28,530

—

Short-term debt repayments

(4,820

)

—

(26,402

)

—

Repurchases of convertible debt

—

(202,587

)

(3,975

)

(541,600

)

Repurchases of common shares

—

(74,556

)

(280,724

)

(574,120

)

Proceeds from exercise of stock options

5,209

4,847

12,228

34,209

Tax benefits from stock options exercised

2,367

2,042

5,842

33,658

Payments of employee withholding tax upon vesting of share-based awards

(7,376

)

(2,477

)

(21,110

)

(57,155

)

Cash settlement of call options

—

(66,864

)

—

(66,864

)

Cash settlement of convertible debt

(62,086

)

—

(62,086

)

—

Acquisition of noncontrolling interest

—

(28,515

)

—

(28,515

)

Payments of contingent consideration

(18,826

)

—

(79,844

)

—

Payments of debt issuance costs

(22,562

)

(11,777

)

(25,104

)

(31,590

)

Net cash (used in) provided by financing activities

(7,932

)

299,025

495,004

711,623

Effect of exchange rate changes on cash and cash equivalents

965

(14,496

)

1,872

(7,570

)

Net (decrease) increase in cash and cash equivalents

(137,536

)

15,614

93,619

(139,710

)

Cash and cash equivalents, beginning of period

395,266

238,945

164,111

394,269

Cash and cash equivalents, end of period

$

257,730

$

254,559

$

257,730

$

254,559

Non-Cash Investing and Financing Activities

Acquisition of businesses, contingent consideration at fair value

$

(17,257

)

$

—

$

(143,285

)

$

(397,150

)

Settlement of convertible debt, equity issued

—

—

—

(892,000

)

Acquisition of businesses, debt assumed

—

—

(46,336

)

—

The accompanying notes are an integral part of these consolidated financial statements.

4

VALEANT PHARMACEUTICALS INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(All tabular amounts expressed in thousands of U.S. dollars, except per share data)

(Unaudited)

1.

DESCRIPTION OF BUSINESS

On September 28, 2010 (the “Merger Date”), Biovail Corporation (“Biovail”) completed the acquisition of Valeant Pharmaceuticals International (“Valeant”) through a wholly-owned subsidiary pursuant to an Agreement and Plan of Merger, dated as of June 20, 2010, with Valeant surviving as a wholly-owned subsidiary of Biovail (the “Merger”). In connection with the Merger, Biovail was renamed “Valeant Pharmaceuticals International, Inc.” (the “Company”). The Company is a multinational, specialty pharmaceutical company that develops, manufactures and markets a broad range of pharmaceutical products primarily in the areas of dermatology, neurology and branded generics.

2.

SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements (the “unaudited consolidated financial statements”) have been prepared by the Company in United States (“U.S.”) dollars and in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial reporting, which do not conform in all respects to the requirements of U.S. GAAP for annual financial statements. Accordingly, these condensed notes to the unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto prepared in accordance with U.S. GAAP that are contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 (the “2011 Form 10-K”). The unaudited consolidated financial statements have been prepared using accounting policies that are consistent with the policies used in preparing the Company’s audited consolidated financial statements for the year ended December 31, 2011. There have been no changes to the Company’s significant accounting policies since December 31, 2011, except as described below under “Adoption of New Accounting Standards”. The unaudited consolidated financial statements reflect all normal and recurring adjustments necessary for a fair statement of the Company’s financial position and results of operations for the interim periods presented.

Reclassifications and Revisions

Certain reclassifications have been made to prior year amounts to conform with the current year presentation.

The Company has revised the 2011 consolidated statement of cash flows for the presentation of the proceeds from the out-license of an intangible asset to conform to the current year presentation. The Company decreased Net cash used in investing activities with an offsetting decrease in Net cash provided by operating activities by $36.0 million for the nine-month period ended September 30, 2011. This revision did not have a material impact to the Company’s previously reported consolidated statement of cash flows. This change had no effect on the Company’s previously reported consolidated balance sheets, consolidated statements of income (loss) and consolidated statements of comprehensive income (loss).

Use of Estimates

In preparing the unaudited consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the unaudited consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates and the operating results for the interim periods presented are not necessarily indicative of the results expected for the full year.

On an ongoing basis, management reviews its estimates to ensure that these estimates appropriately reflect changes in the Company’s business and new information as it becomes available. If historical experience and other factors used by management to make these estimates do not reasonably reflect future activity, the Company’s results of operations and financial position could be materially impacted.

5

VALEANT PHARMACEUTICALS INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular amounts expressed in thousands of U.S. dollars, except per share data)

(Unaudited)

Adoption of New Accounting Standards

Effective January 1, 2012, the Company has adopted on a prospective basis the provisions of the following new accounting standards:

•

Guidance that results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and International Financial Reporting Standards (“IFRS”). The amendments change some fair value measurement principles and disclosure requirements under U.S. GAAP. The adoption of this guidance did not have a significant impact on the Company’s financial position or results of operations.

•

Guidance requiring entities to present net income and other comprehensive income in either a single continuous statement or in two separate, but consecutive, statements of net income and other comprehensive income. This guidance does not change the components of other comprehensive income or the calculation of earnings per share. The effective date for amendments to the presentation of reclassifications out of accumulated other comprehensive income has been deferred. As this guidance relates to presentation only, the adoption of this guidance did not impact the Company’s financial position or results of operations.

•

Guidance intended to simplify goodwill impairment testing, by allowing an entity to first assess qualitative factors to determine whether it is “more likely than not” that the fair value of a reporting unit is less than the carrying amount as a basis for determining whether it is necessary to perform a two-step goodwill impairment test. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. The adoption of this guidance did not have a significant impact on the Company’s financial position or results of operations.

In July 2012, the Financial Accounting Standards Board (“FASB”) issued guidance intended to simplify indefinite-lived intangible impairment testing, by allowing an entity to first assess qualitative factors to determine whether it is “more likely than not” that the fair value of an asset is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative impairment test. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. This guidance is effective for annual and interim tests performed for fiscal years beginning after September 15, 2012. The adoption of this guidance is not expected to have a significant impact on the Company’s financial position or results of operations.

3.

BUSINESS COMBINATIONS

The Company has focused its business on core geographies and therapeutic classes through selective acquisitions, dispositions and strategic partnerships with other pharmaceutical companies.

(a) Business combinations in 2012 include the following:

OraPharma

Description of the Transaction

On June 18, 2012, the Company acquired OraPharma Topco Holdings, Inc. (“OraPharma”), a specialty oral health company located in the U.S. that develops and commercializes products that improve and maintain oral health. The Company made an up-front payment of $289.3 million, and the Company may pay a series of contingent consideration payments of up to $114.0 million based on certain milestones, including certain revenue targets. The fair value of the contingent consideration was determined to be $99.2 million as of the acquisition date, for a total fair value of consideration transferred of $388.5 million. As of September 30, 2012, the assumptions used for determining fair value of the contingent consideration have not changed significantly from those used at the acquisition date. The Company also repaid at the closing $37.9 million of assumed debt.

OraPharma’s lead product is Arestin®, a locally administered antibiotic for the treatment of periodontitis that utilizes an advanced controlled-release delivery system and is indicated for use in conjunction with scaling and root planing for the treatment of adult periodontitis.

6

VALEANT PHARMACEUTICALS INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular amounts expressed in thousands of U.S. dollars, except per share data)

(Unaudited)

Assets Acquired and Liabilities Assumed

The transaction has been accounted for as a business combination under the acquisition method of accounting. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date. The following recognized amounts are provisional and subject to change:

•

amounts for intangible assets, property, plant and equipment and inventories, pending finalization of the valuation;

•

amounts for income tax assets and liabilities, pending finalization of estimates and assumptions in respect of certain tax aspects of the transaction; and

•

amount of goodwill pending the completion of the valuation of the assets acquired and liabilities assumed.

The Company will finalize these amounts as it obtains the information necessary to complete the measurement process. Any changes resulting from facts and circumstances that existed as of the acquisition date may result in retrospective adjustments to the provisional amounts recognized at the acquisition date. These changes could be significant. The Company will finalize these amounts no later than one year from the acquisition date.

Amounts

Recognized as of

Acquisition Dates(a)

Measurement

Period

Adjustments(b)

Amounts

Recognized

(as adjusted)

Cash

$

14,119

$

—

$

14,119

Accounts receivable(c)

10,348

—

10,348

Inventories

3,222

(685

)

2,537

Other current assets

4,063

22

4,085

Property and equipment

8,181

—

8,181

Identifiable intangible assets, excluding acquired IPR&D(d)

466,408

(64,095

)

402,313

Acquired IPR&D(e)

15,464

13,151

28,615

Other non-current assets

1,862

—

1,862

Current liabilities

(9,675

)

(395

)

(10,070

)

Long-term debt, including current portion(f)

(37,868

)

—

(37,868

)

Deferred income taxes, net

(173,907

)

18,386

(155,521

)

Other non-current liabilities

(158

)

—

(158

)

Total identifiable net assets

302,059

(33,616

)

268,443

Goodwill(g)

86,802

33,255

120,057

Total fair value of consideration transferred

$

388,861

$

(361

)

$

388,500

______________________

(a)

As previously reported in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012.

(b)

The measurement period adjustments primarily reflect: (i) changes in the estimated fair value of the Arestin® product brand; (ii) the reclassification of intangible assets from product brands to acquired in-process research and development (“IPR&D”); (iii) a decrease in the total fair value of consideration transferred due to a working capital adjustment; and (iv) the tax impact of pre-tax measurement period adjustments. The measurement period adjustments were made to reflect facts and circumstances existing as of the acquisition date, and did not result from intervening events subsequent to the acquisition date. These adjustments did not have a significant impact on the Company’s previously reported consolidated financial statements and, therefore, the Company has not retrospectively adjusted those financial statements.

(c)

Both the fair value and gross contractual amount of trade accounts receivable acquired were $10.3 million, as the Company expects that the amount to be uncollectible is negligible.

(d)

The following table summarizes the provisional amounts and useful lives assigned to identifiable intangible assets:

7

VALEANT PHARMACEUTICALS INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular amounts expressed in thousands of U.S. dollars, except per share data)

(Unaudited)

Weighted-

Average

Useful Lives

(Years)

Amounts

Recognized as of

Acquisition Date

Measurement

Period

Adjustments

Amounts

Recognized

(as adjusted)

Product brand

12

$

446,958

$

(62,450

)

$

384,508

Corporate brand

15

19,450

(1,645

)

17,805

Total identifiable intangible assets acquired

12

$

466,408

$

(64,095

)

$

402,313

(e)

The IPR&D assets primarily relate to the development of Arestin ER, which is indicated for oral hygiene use and Arestin Peri-Implantitis, which is indicated for anti-inflammatory and anti-bacterial use.

(f)

Effective June 18, 2012, the Company terminated the credit facility agreement, repaid the assumed debt outstanding and cancelled the undrawn credit facilities.

(g)

Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the provisional values assigned to the assets acquired and liabilities assumed. None of the goodwill is expected to be deductible for tax purposes. The goodwill recorded represents the following:

•

cost savings, operating synergies and other benefits expected to result from combining the operations of OraPharma with those of the Company;

•

the value of the continuing operations of OraPharma’s existing business (that is, the higher rate of return on the assembled net assets versus if the Company had acquired all of the net assets separately); and

The provisional amount of goodwill has been allocated to the Company’s U.S. Dermatology segment as indicated in note 10.

Acquisition-Related Costs

The Company has incurred to date $3.7 million of transaction costs directly related to the OraPharma acquisition, which includes expenditures for advisory, legal, valuation, accounting and other similar services. These costs have been expensed as acquisition-related costs.

Revenue and Net Loss of OraPharma

The revenues of OraPharma for the period from the acquisition date to September 30, 2012 were $28.3 million, and the net loss was $3.5 million. The net loss includes the effects of the acquisition accounting adjustments and acquisition-related costs.

Other Business Combinations

Description of the Transactions

In the nine-month period ended September 30, 2012, the Company completed other business combinations, which included the following businesses, as well as other smaller acquisitions, for an aggregate purchase price of $744.4 million. The aggregate purchase price included contingent consideration obligations with an aggregate acquisition date fair value of $44.2 million.

•

On September 28, 2012, the Company acquired certain assets from Johnson & Johnson Consumer Companies, Inc. (“J&J North America”) for a purchase price of $109.6 million, relating to the U.S. and Canadian rights to the over-the-counter (“OTC”) consumer brands Ambi®, Caladryl®, Corn Huskers®, Cortaid®, Purpose® and Shower to Shower®.

•

On September 24, 2012, the Company acquired certain assets from QLT Inc. and QLT Ophthalmics, Inc. (collectively, “QLT”) relating to Visudyne®,which is used to treat abnormal growth of leaky blood vessels in the eye caused by wet age-related macular degeneration. The consideration paid included up-front payments of $62.5 million for the assets related to the rights to the product in the U.S. and $50.0 million for the assets

8

VALEANT PHARMACEUTICALS INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular amounts expressed in thousands of U.S. dollars, except per share data)

(Unaudited)

related to the rights to the product outside the U.S. The Company may pay a series of contingent payments of up to $20.0 million relating to non-U.S. royalties and development milestones for QLT’s laser program in the U.S. In addition, the Company will pay royalties on sales of potential new indications for Visudyne® in the U.S. The fair value of the contingent consideration was determined to be $7.9 million as of the acquisition date. As of September 30, 2012, the assumptions used for determining fair value of the contingent consideration have not changed significantly from those used at the acquisition date.

•

On May 23, 2012, the Company acquired certain assets from University Medical Pharmaceuticals Corp. (“University Medical”), a specialty pharmaceutical company located in the U.S. focused on skincare products, including the rights to University Medical’s main brand AcneFree™, a retail OTC acne treatment. The consideration includes up-front payments of $65.0 million, and the Company may pay a series of contingent consideration payments of up to $40.0 million if certain net sales milestones are achieved. The fair value of the contingent consideration was determined to be $1.5 million as of the acquisition date. As of September 30, 2012, the assumptions used for determining fair value of the contingent consideration have not changed significantly from those used at the acquisition date.

•

On May 2, 2012, the Company acquired certain assets from Atlantis Pharma (“Atlantis”), a branded generics pharmaceutical company located in Mexico, for up-front payments of $65.5 million (MXN$847.3 million), and the Company placed an additional $8.9 million (MXN$114.7 million) into an escrow account. The amounts in escrow will be paid to the sellers only if certain regulatory milestones are achieved and therefore such amounts were treated as contingent consideration. The fair value of the contingent consideration was determined to be $7.6 million as of the acquisition date. As of September 30, 2012, the assumptions used for determining fair value of the contingent consideration have not changed significantly from those used at the acquisition date. Since the acquisition date, certain amounts have been released from escrow to the sellers, reducing the escrow balance to $8.2 million as of September 30, 2012. The escrow balance is classified as Restricted cash in the Company’s consolidated balance sheets. Atlantis has a broad product portfolio, including products in gastro, analgesics and anti-inflammatory therapeutic categories.

•

On March 13, 2012, the Company acquired certain assets from Gerot Lannach, a branded generics pharmaceutical company based in Austria. The Company made an up-front payment of $164.0 million (€125.0 million), and the Company may pay a series of contingent consideration payments of up to $19.7 million (€15.0 million) if certain net sales milestones are achieved. The fair value of the contingent consideration was determined to be $16.8 million as of the acquisition date. As of September 30, 2012, the assumptions used for determining fair value of the contingent consideration have not changed significantly from those used at the acquisition date. As part of the transaction, the Company also entered into a ten-year exclusive supply agreement with Gerot Lannach for the acquired products. Approximately 90% of sales relating to the acquired assets are in Russia, with sales also made in certain Commonwealth of Independent States (CIS) countries including Kazakhstan and Uzbekistan. Gerot Lannach’s largest product is acetylsalicylic acid, a low dose aspirin.

•

On February 1, 2012, the Company acquired Probiotica Laboratorios Ltda. (“Probiotica”), which markets OTC sports nutrition products and other food supplements in Brazil, for a purchase price of $90.5 million (R$158.0 million).

•

During the nine months ended September 30, 2012, the Company completed other smaller acquisitions which are not material individually or in the aggregate. These acquisitions are included in the aggregated amounts presented below.

Assets Acquired and Liabilities Assumed

These transactions have been accounted for as business combinations under the acquisition method of accounting. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed related to the other business combinations, in the aggregate, as of the acquisition dates. The following recognized amounts with respect to the J&J North America, QLT, University Medical, Probiotica, and certain other smaller acquisitions are provisional and subject to change:

9

VALEANT PHARMACEUTICALS INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular amounts expressed in thousands of U.S. dollars, except per share data)

(Unaudited)

•

amounts for intangible assets, property, plant and equipment and inventories, pending finalization of the valuation;

•

amounts for non-current liabilities, and corresponding indemnification assets, pending finalization of the assessment of contingent liabilities;

•

amounts for income tax assets and liabilities, pending finalization of estimates and assumptions in respect of certain tax aspects of the transaction; and

•

amount of goodwill pending the completion of the valuation of the assets acquired and liabilities assumed.

The Company will finalize these amounts as it obtains the information necessary to complete the measurement processes. Any changes resulting from facts and circumstances that existed as of the acquisition dates may result in retrospective adjustments to the provisional amounts recognized at the acquisition dates. These changes could be significant. The Company will finalize these amounts no later than one year from the respective acquisition dates.

Amounts

Recognized as of

Acquisition Dates

Measurement

Period

Adjustments(a)

Amounts

Recognized

(as adjusted)

Cash and cash equivalents

$

6,459

$

(258

)

$

6,201

Accounts receivable(b)

28,281

(17

)

28,264

Assets held for sale(c)

15,566

—

15,566

Inventories

59,884

(121

)

59,763

Other current assets

2,523

—

2,523

Property, plant and equipment

7,209

—

7,209

Identifiable intangible assets, excluding acquired IPR&D(d)

601,412

2,852

604,264

Acquired IPR&D

1,234

—

1,234

Indemnification assets(e)

27,901

—

27,901

Current liabilities

(30,815

)

(350

)

(31,165

)

Liability for uncertain tax position

(6,682

)

6,682

—

Other non-current liabilities(e)

(27,901

)

—

(27,901

)

Deferred income taxes, net

(9,198

)

373

(8,825

)

Total identifiable net assets

675,873

9,161

685,034

Goodwill(f)

68,612

(9,239

)

59,373

Total fair value of consideration transferred

$

744,485

$

(78

)

$

744,407

________________________

(a)

The measurement period adjustments relate to the Probiotica acquisition and primarily reflect: (i) the elimination of the liability for uncertain tax positions; (ii) the changes in the estimated fair value of the corporate brand intangible asset; and (iii) a decrease in the total fair value of consideration transferred due to a working capital adjustment. The measurement period adjustments were made to reflect facts and circumstances existing as of the acquisition date, and did not result from intervening events subsequent to the acquisition date. These adjustments did not have a significant impact on the Company’s previously reported consolidated financial statements and, therefore, the Company has not retrospectively adjusted those financial statements.

(b)

The fair value of trade accounts receivable acquired was $28.3 million, with the gross contractual amount being $29.6 million, of which the Company expects that $1.3 million will be uncollectible.

(c)

Assets held for sale relate to a product brand acquired in the Atlantis acquisition. Subsequent to that acquisition, the plan of sale changed, and the Company no longer intends to sell the asset. Consequently, the product brand is not classified as an asset held for sale as of September 30, 2012.

(d)

The following table summarizes the provisional amounts and useful lives assigned to identifiable intangible assets:

10

VALEANT PHARMACEUTICALS INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular amounts expressed in thousands of U.S. dollars, except per share data)

(Unaudited)

Weighted-

Average

Useful Lives

(Years)

Amounts

Recognized as of

Acquisition Date

Measurement

Period

Adjustments

Amounts

Recognized

(as adjusted)

Product brands

9

$

393,427

$

—

$

393,427

Corporate brands

12

31,503

3,725

35,228

Product rights

10

109,274

(873

)

108,401

Royalty agreement

9

36,277

—

36,277

Partner relationships

5

30,931

—

30,931

Total identifiable intangible assets acquired

10

$

601,412

$

2,852

$

604,264

(e)

Other non-current liabilities, and the corresponding indemnification assets, primarily relate to certain asserted and unasserted claims against Probiotica, which include potential tax-related obligations that existed at the acquisition date. The Company is indemnified by the sellers in accordance with indemnification provisions under its contractual arrangements. Indemnification assets and contingent liabilities were recorded at the same amount and classified in the same manner, as components of the purchase price, representing our best estimates of these amounts at the acquisition date, in accordance with guidance for loss contingencies and uncertain tax positions. Under the Company’s contractual arrangement with Probiotica, there is no limitation on the amount or value of indemnity claims that can be made by the Company; however there is a time restriction of either two or five years, depending on the nature of the claim. Approximately $12.9 million (R$22.5 million) of the purchase price for the Probiotica transaction from the date of acquisition has been placed in escrow in accordance with the indemnification provisions. The escrow account will be maintained for two years, with 50% being released to the sellers after the first year, and the remaining balance released after the second year. The Company expects the total amount of such indemnification assets to be collectible from the sellers. The Company is continuing to gather and assess information with respect to the non-current liabilities and indemnification assets.

(f)

The goodwill relates primarily to the Probiotica acquisition. Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the provisional values assigned to the assets acquired and liabilities assumed. The Company expects that the goodwill will be deductible for tax purposes. The goodwill recorded from the J&J North America, QLT, University Medical, Atlantis and Gerot Lannach acquisitions represents primarily the cost savings, operating synergies and other benefits expected to result from combining the operations with those of the Company. Probiotica’s goodwill recorded represents the following:

•

the Company’s expectation to develop and market new product brands and product lines in the future;

•

the value associated with the Company’s ability to develop relationships with new customers;

•

the value of the continuing operations of Probiotica’s existing business (that is, the higher rate of return on the assembled net assets versus if the Company had acquired all of the net assets separately); and

The provisional amount of the goodwill from the J&J North America, QLT and University Medical acquisitions has been allocated to the Company’s U.S. Dermatology segment. The provisional amount of the goodwill from the Probiotica acquisition, and the amounts of goodwill from the Atlantis and Gerot Lannach acquisitions, have been allocated to the Company’s Emerging Markets segment.

Acquisition-Related Costs

The Company has incurred to date $9.0million, in the aggregate, of transaction costs directly related to the other business combinations, which includes expenditures for advisory, legal, valuation, accounting and other similar services. These costs have been expensed as acquisition-related costs.

Revenue and Net Loss of Other Business Combinations

The revenues of the other business combinations for the period from the respective acquisition dates to September 30, 2012 were $106.6 million, in the aggregate, and the net loss was $10.5 million, in the aggregate. The net loss includes the effects of the acquisition accounting adjustments and acquisition-related costs.

(b) Business combinations in 2011 include the following:

iNova

11

VALEANT PHARMACEUTICALS INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular amounts expressed in thousands of U.S. dollars, except per share data)

(Unaudited)

Description of the Transaction

On December 21, 2011, the Company acquired iNova from Archer Capital, Ironbridge Capital and other minority management shareholders. The Company made up-front payments of $656.7 million (AUD$657.9 million) and the Company may pay a series of potential milestones of up to $59.9 million (AUD$60 million) based on the success of pipeline activities, product registrations and overall revenue. The fair value of the contingent consideration was determined to be $44.5 million as of the acquisition date, for a total fair value of consideration transferred of $701.2 million. As of September 30, 2012, the assumptions used for determining the fair value of the acquisition-related contingent consideration have not changed significantly from those used at the acquisition date.

iNova sells and distributes a range of prescription and OTC products in Australia, New Zealand, Asia and South Africa, including leading therapeutic weight management brands such as Duromine®/Metermine®, as well as leading OTC brands in the cold and cough area, such as Difflam®, Duro-Tuss® and Rikodeine®.

Assets Acquired and Liabilities Assumed

The transaction has been accounted for as a business combination under the acquisition method of accounting. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date.

Amounts

Recognized as of

Acquisition Date(a)

Measurement

Period

Adjustments(b)

Amounts

Recognized

(as adjusted)

Cash and cash equivalents

$

8,792

$

—

$

8,792

Accounts receivable(c)

30,525

—

30,525

Inventories

43,387

(1,400

)

41,987

Property, plant and equipment(d)

15,257

(749

)

14,508

Identifiable intangible assets(e)

423,950

(2,188

)

421,762

Deferred income taxes, net

—

15,893

15,893

Current liabilities

(32,500

)

(1,713

)

(34,213

)

Total identifiable net assets

489,411

9,843

499,254

Goodwill(f)

211,770

(9,843

)

201,927

Total fair value of consideration transferred

$

701,181

$

—

$

701,181

_________________________

(a)

As previously reported in the 2011 Form 10-K.

(b)

The measurement period adjustments primarily reflect: (i) resolution of certain tax aspects of the transaction and the tax impact of pre-tax measurement period adjustments; (ii) changes in the estimated fair value of an intangible asset and the related inventory; (iii) additional information obtained with respect to the fair value of an acquired manufacturing facility; and (iv) additional information obtained with respect to the valuation of compensation-related liabilities. The measurement period adjustments were made to reflect facts and circumstances existing as of the acquisition date, and did not result from intervening events subsequent to the acquisition date. These adjustments did not have a significant impact on the Company’s previously reported consolidated financial statements and, therefore, the Company has not retrospectively adjusted those financial statements.

(c)

The fair value of trade accounts receivable acquired was $30.5 million, with the gross contractual amount being $31.5 million, of which the Company expects that $1.0 million will be uncollectible.

(d)

Property, plant and equipment includes a manufacturing facility, included in the Canada and Australia segment, which was subsequently sold during the third quarter of 2012 for $10.2 million, which equaled its carrying amount.

(e)

The following table summarizes the amounts and useful lives assigned to identifiable intangible assets:

12

VALEANT PHARMACEUTICALS INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular amounts expressed in thousands of U.S. dollars, except per share data)

(Unaudited)

Weighted-

Average

Useful Lives

(Years)

Amounts

Recognized as of

Acquisition Date

Measurement

Period

Adjustments

Amounts

Recognized

(as adjusted)

Product brands

8

$

418,252

$

(2,188

)

$

416,064

Corporate brands

4

5,698

—

5,698

Total identifiable intangible assets acquired

8

$

423,950

$

(2,188

)

$

421,762

(f)

Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the values assigned to the assets acquired and liabilities assumed. None of the goodwill is expected to be deductible for tax purposes. The goodwill recorded represents the following:

•

cost savings, operating synergies and other benefits expected to result from combining the operations of iNova with those of the Company;

•

the value of the continuing operations of iNova’s existing business (that is, the higher rate of return on the assembled net assets versus if the Company had acquired all of the net assets separately); and

The goodwill has been allocated to the Company’s Canada and Australia segment ($119.5 million) and the Company’s Emerging Markets segment ($82.4 million).

Dermik

Description of the Transaction

On December 16, 2011, the Company acquired Dermik, a dermatological unit of Sanofi in the U.S. and Canada, as well as the worldwide rights to Sculptra® and Sculptra® Aesthetic, for a total cash purchase price of approximately $421.6 million. The acquisition includes Dermik’s inventories and manufacturing facility located in Laval, Quebec. In connection with the acquisition of Dermik, the Company was required by the Federal Trade Commission (“FTC”) to divest 1% clindamycin and 5% benzoyl peroxide gel, a generic version of BenzaClin®, and 5% fluorouracil cream, an authorized generic of Efudex®. For further details, see note 4 titled “ACQUISITIONS AND DISPOSITIONS”.

Dermik is a leading global medical dermatology business focused on the manufacturing, marketing and sale of therapeutic and aesthetic dermatology products.

Assets Acquired and Liabilities Assumed

The transaction has been accounted for as a business combination under the acquisition method of accounting. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date.

Amounts

Recognized as of

Acquisition Date(a)

Measurement

Period

Adjustments(b)

Amounts

Recognized

(as adjusted)

Inventories

$

32,360

$

(3,792

)

$

28,568

Property, plant and equipment

39,581

—

39,581

Identifiable intangible assets(c)

341,680

1,969

343,649

Deferred tax liability

(1,262

)

—

(1,262

)

Total identifiable net assets

412,359

(1,823

)

410,536

Goodwill(d)

8,141

2,935

11,076

Total fair value of consideration transferred

$

420,500

$

1,112

$

421,612

_________________________

13

VALEANT PHARMACEUTICALS INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular amounts expressed in thousands of U.S. dollars, except per share data)

(Unaudited)

(a)

As previously reported in the 2011 Form 10-K.

(b)

The measurement period adjustments primarily reflect: (i) changes in estimated inventory reserves, (ii) revisions to certain assumptions impacting the fair value of intangible assets; and (iii) an increase in the total fair value of consideration transferred pursuant to a working capital adjustment provision under the purchase agreement. The measurement period adjustments were made to reflect facts and circumstances existing as of the acquisition date, and did not result from intervening events subsequent to the acquisition date. These adjustments did not have a significant impact on the Company’s previously reported consolidated financial statements and, therefore, the Company has not retrospectively adjusted those financial statements.

(c)

The following table summarizes the amounts and useful lives assigned to identifiable intangible assets:

Weighted-

Average

Useful Lives

(Years)

Amounts

Recognized as of

Acquisition Date

Measurement

Period

Adjustments

Amounts

Recognized

(as adjusted)

Product brands

9

$

292,472

$

1,816

$

294,288

Product rights

5

33,857

227

34,084

Manufacturing agreement

5

15,351

(74

)

15,277

Total identifiable intangible assets acquired

9

$

341,680

$

1,969

$

343,649

(d)

Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the values assigned to the assets acquired and liabilities assumed. The Company expects that $6.4 million of the goodwill will be deductible for tax purposes. The goodwill recorded represents primarily the value of Dermik’s assembled workforce. The goodwill has been allocated to the Company’s U.S. Dermatology segment.

Ortho Dermatologics

Description of the Transaction

On December 12, 2011, the Company acquired assets of the Ortho Dermatologics division of Janssen Pharmaceuticals, Inc., for a total cash purchase price of approximately $345.2 million. The assets acquired included prescription brands Retin-A Micro®, Ertaczo®, Renova® and Biafine®.

Ortho Dermatologics is a leader in the field of dermatology and has developed several products to treat skin disorders and dermatologic conditions.

Assets Acquired and Liabilities Assumed

The transaction has been accounted for as a business combination under the acquisition method of accounting. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date.

Amounts

Recognized as of

Acquisition Date(a)

Measurement

Period

Adjustments(b)

Amounts

Recognized

(as adjusted)

Inventories

$

6,169

$

—

$

6,169

Property, plant and equipment

206

—

206

Identifiable intangible assets, excluding acquired IPR&D(c)

333,599

—

333,599

Acquired IPR&D(d)

4,318

—

4,318

Deferred tax liability

(1,690

)

—

(1,690

)

Total identifiable net assets

342,602

—

342,602

Goodwill(e)

3,507

(915

)

2,592

Total fair value of consideration transferred

$

346,109

$

(915

)

$

345,194

____________________

(a)

As previously reported in the 2011 Form 10-K.

14

VALEANT PHARMACEUTICALS INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular amounts expressed in thousands of U.S. dollars, except per share data)

(Unaudited)

(b)

The measurement period adjustment reflects a decrease in the total fair value of consideration transferred pursuant to a working capital adjustment provision under the purchase agreement. The measurement period adjustment was made to reflect facts and circumstances existing as of the acquisition date, and did not result from intervening events subsequent to the acquisition date. This adjustment did not have a significant impact on the Company’s previously reported consolidated financial statements and, therefore, the Company has not retrospectively adjusted those financial statements.

(c)

The identifiable intangible assets acquired relate to product brands intangible assets with an estimated weighted-average useful life of approximately nine years.

(d)

The acquired IPR&D asset relates to the development of the MC5 program, a topical treatment for acne vulgaris. In the second quarter of 2012, the Company terminated the MC5 program and recognized a charge of $4.3 million to write off the related IPR&D asset. This charge was recognized as Acquired in-process research and development in the Company’s consolidated statements of income (loss).

(e)

Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the values assigned to the assets acquired and liabilities assumed. None of the goodwill is expected to be deductible for tax purposes. The goodwill recorded represents primarily the cost savings, operating synergies and other benefits expected to result from combining the operations of Ortho Dermatologics with those of the Company. The goodwill has been allocated to the Company’s U.S. Dermatology segment.

Afexa

Description of the Transaction

On October 17, 2011, the Company acquired 73.8% (80,929,921 common shares) of the outstanding common shares of Afexa Life Sciences Inc. (“Afexa”) for cash consideration of $67.7 million. The acquisition date fair value of the 26.2% noncontrolling interest in Afexa of $23.8 million was estimated using quoted market prices on such date, for a total fair value of consideration transferred of $91.5 million.

At a special meeting of Afexa shareholders held on December 12, 2011, a subsequent acquisition transaction was approved resulting in the privatization of Afexa and the remaining shareholders receiving C$0.85 per share. Consequently, as of December 31, 2011, the Company owned 100% of Afexa.

Afexa markets several consumer brands, such as Cold-FX®, an OTC cold and flu treatment, and Coldsore-FX®, a topical OTC cold sore treatment.

Assets Acquired and Liabilities Assumed

The transaction has been accounted for as a business combination under the acquisition method of accounting. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date.

Amounts

Recognized as of

Acquisition Date(a)

Measurement

Period

Adjustments(b)

Amounts

Recognized

(as adjusted)

Cash

$

1,558

$

—

$

1,558

Accounts receivable(c)

9,436

(1,524

)

7,912

Inventories

22,489

—

22,489

Other current assets

5,406

—

5,406

Property and equipment

8,766

—

8,766

Identifiable intangible assets(d)

80,580

(5,850

)

74,730

Current liabilities

(18,104

)

—

(18,104

)

Deferred income taxes, net

(20,533

)

1,462

(19,071

)

Other non-current liabilities

(1,138

)

—

(1,138

)

Total identifiable net assets

88,460

(5,912

)

82,548

Goodwill(e)

3,070

5,912

8,982

Total fair value of consideration transferred

$

91,530

$

—

$

91,530

________________________

15

VALEANT PHARMACEUTICALS INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular amounts expressed in thousands of U.S. dollars, except per share data)

(Unaudited)

(a)

As previously reported in the 2011 Form 10-K.

(b)

The measurement period adjustments primarily reflect: (i) changes in the estimated fair value of certain intangible assets; (ii) changes in estimated sales reserves; and (iii) the tax impact of pre-tax measurement period adjustments. The measurement period adjustments were made to reflect facts and circumstances existing as of the acquisition date, and did not result from intervening events subsequent to the acquisition date. These adjustments did not have a significant impact on the Company’s previously reported consolidated financial statements and, therefore, the Company has not retrospectively adjusted those financial statements.

(c)

Both the fair value and gross contractual amount of trade accounts receivable acquired were $7.9 million, as the Company expects that the amount to be uncollectible is negligible.

(d)

The following table summarizes the amounts and useful lives assigned to identifiable intangible assets:

Weighted-

Average

Useful Lives

(Years)

Amounts

Recognized as of

Acquisition Date

Measurement

Period

Adjustments

Amounts

Recognized

(as adjusted)

Product brands

11

$

65,194

$

(5,850

)

$

59,344

Patented technology

7

15,386

—

15,386

Total identifiable intangible assets acquired

10

$

80,580

$

(5,850

)

$

74,730

(e)

Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the values assigned to the assets acquired and liabilities assumed. None of the goodwill is expected to be deductible for tax purposes. The goodwill recorded represents the following:

•

cost savings, operating synergies and other benefits expected to result from combining the operations of Afexa with those of the Company; and

The goodwill has been allocated to the Company’s Canada and Australia segment.

Sanitas

Description of the Transaction

On August 19, 2011 (the “Sanitas Acquisition Date”), the Company acquired 87.2% of the outstanding shares of AB Sanitas (“Sanitas”) for cash consideration of $392.3 million. Prior to the Sanitas Acquisition Date, the Company acquired 1,502,432 shares of Sanitas, which represented approximately 4.8% of the outstanding shares. As a result, as of the Sanitas Acquisition Date, the Company held a controlling financial interest in Sanitas of 92%, or 28,625,025 shares. The acquisition date fair value of the 8% noncontrolling interest in Sanitas of $34.8 million, and the acquisition date fair value of the previously-held 4.8% equity interest of $21.1 million, were estimated using quoted market prices on such date.

On September 2, 2011, the Company announced a mandatory non-competitive tender offer (the “Tender Offer”) to purchase the remaining outstanding ordinary shares of Sanitas from all public shareholders at €10.06 per share. The Tender Offer closed on September 15, 2011, on which date the Company purchased an additional 1,968,631 shares (6.4% of the outstanding shares of Sanitas) for approximately $27.4 million. As a result of this purchase, the Company owned 30,593,656 shares or approximately 98.4% of Sanitas as of September 15, 2011.

On September 22, 2011, the Company received approval from the Securities Commission of the Republic of Lithuania to conduct the mandatory tender offer through squeeze out procedures (the “Squeeze Out”) at a price per one ordinary share of Sanitas equal to €10.06, which required that all minority shareholders sell to the Company the ordinary shares of Sanitas owned by them (512,264 ordinary shares, or 1.6% of Sanitas).

As the Company maintained a controlling financial interest in Sanitas during the Tender Offer, the additional ownership interest of 6.4% acquired in Sanitas was accounted for as an equity transaction between owners. The noncontrolling interest in Sanitas of approximately 1.6% to be acquired through the Squeeze Out procedures was classified as a liability

16

VALEANT PHARMACEUTICALS INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular amounts expressed in thousands of U.S. dollars, except per share data)

(Unaudited)

in the Company’s consolidated balance sheet as it was mandatorily redeemable. As of September 30, 2012, the amount due to Sanitas shareholders of $2.4 million was included in Accrued liabilities and other current liabilities.

Sanitas has a broad branded generics product portfolio consisting of 390 products in nine countries throughout Central and Eastern Europe, primarily Poland, Russia and Lithuania. Sanitas has in-house development capabilities in dermatology, hospital injectables and ophthalmology, and a pipeline of internally developed and acquired dossiers.

Assets Acquired and Liabilities Assumed

The transaction has been accounted for as a business combination under the acquisition method of accounting. The Company has not recognized any additional measurement period adjustments to the amounts previously reported in the 2011 Form 10-K. The amount of goodwill of $204.8 million has been allocated to the Company’s Emerging Markets segment.

PharmaSwiss

Description of the Transaction

On March 10, 2011, the Company acquired all of the issued and outstanding stock of PharmaSwiss S.A. (“PharmaSwiss”), a privately-owned branded generics and OTC pharmaceutical company based in Zug, Switzerland. As of the acquisition date, the total consideration transferred to effect the acquisition of PharmaSwiss comprised of cash paid of $491.2 million (€353.1 million) and the rights to contingent consideration payments of up to $41.7 million (€30.0 million) if certain net sales milestones of PharmaSwiss were achieved for the 2011 calendar year. The fair value of the contingent payments was determined to be $27.5 million as of the acquisition date. In May 2012, the Company made a contingent consideration payment of $12.4 million (€10.0 million) based on the net sales results for the 2011 calendar year. There are no remaining contingent consideration payments under this arrangement.

In connection with the transaction, in February 2011, the Company entered into foreign currency forward-exchange contracts to buy €130.0 million, which were settled on March 9, 2011. The Company recorded a $5.1 million gain on the settlement of these contracts, which was partially offset by a foreign exchange loss of $2.4 million recognized on the remaining €220.0 million bought to finance the transaction. The net foreign exchange gain of $2.7 million was recognized in Foreign exchange and other in the consolidated statement of income (loss) in the three-month period ended March 31, 2011.

PharmaSwiss is an existing partner to several large pharmaceutical and biotech companies offering regional expertise in such functions as regulatory, compliance, sales, marketing and distribution, in addition to developing its own product portfolio. Through its business operations, PharmaSwiss offers a broad product portfolio in seven therapeutic areas and operations in 19 countries throughout Central and Eastern Europe, including Serbia, Hungary, the Czech Republic and Poland, as well as in Greece and Israel.

Assets Acquired and Liabilities Assumed

The transaction has been accounted for as a business combination under the acquisition method of accounting. The Company has not recognized any additional measurement period adjustments to the amounts previously reported in the 2011 Form 10-K. The amount of goodwill of $159.7 million has been allocated to the Company’s Emerging Markets segment.

Pro Forma Impact of Business Combinations

The following table presents unaudited pro forma consolidated results of operations for the three-month and nine-month periods ended September 30, 2012 and 2011, as if the J&J North America, QLT, OraPharma, University Medical, Atlantis, Gerot Lannach and Probiotica acquisitions had occurred as of January 1, 2011 and the PharmaSwiss, Sanitas, Ortho Dermatologics, iNova and Afexa acquisitions had occurred as of January 1, 2010. The unaudited pro forma information does not include the license agreement entered into in June 2011 to acquire the rights to Elidel® and Xerese®, as the impact is immaterial to these pro forma results and it was impracticable to obtain the necessary historical

17

VALEANT PHARMACEUTICALS INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular amounts expressed in thousands of U.S. dollars, except per share data)

(Unaudited)

information as discrete financial statements for these product lines were not prepared. In addition, the unaudited pro forma information does not include the Dermik acquisition, as it was impracticable to obtain the necessary historical information as discrete financial statements were not prepared.

Three Months Ended

September 30,

Nine Months Ended

September 30,

2012

2011

2012

2011

Revenues

$

901,630

$

805,663

$

2,687,041

$

2,433,477

Net income

13,159

18,292

9,783

70,838

Basic earnings per share

$

0.04

$

0.06

$

0.03

$

0.23

Diluted earnings per share

$

0.04

$

0.06

$

0.03

$

0.22

The unaudited pro forma consolidated results of operations were prepared using the acquisition method of accounting and are based on the historical financial information of the Company, J&J North America, QLT, OraPharma, University Medical, Atlantis, Gerot Lannach, Probiotica, PharmaSwiss, Sanitas, Ortho Dermatologics, iNova and Afexa. Except to the extent realized in the three-month and nine-month periods ended September 30, 2012, the unaudited pro forma information does not reflect any cost savings, operating synergies and other benefits that the Company may achieve as a result of these acquisitions, or the costs necessary to achieve these cost savings, operating synergies and other benefits. In addition, except to the extent recognized in the three-month and nine-month periods ended September 30, 2012, the unaudited pro forma information does not reflect the costs to integrate the operations of the Company with those of J&J North America, QLT, OraPharma, University Medical, Atlantis, Gerot Lannach, Probiotica, PharmaSwiss, Sanitas, Ortho Dermatologics, iNova and Afexa.

The unaudited pro forma information is not necessarily indicative of what the Company’s consolidated results of operations actually would have been had the J&J North America, QLT, OraPharma, University Medical, Atlantis, Gerot Lannach and Probiotica acquisitions and the PharmaSwiss, Sanitas, Ortho Dermatologics, iNova and Afexa acquisitions been completed on January 1, 2011 and January 1, 2010, respectively. In addition, the unaudited pro forma information does not purport to project the future results of operations of the Company. The unaudited pro forma information reflects primarily adjustments consistent with the unaudited pro forma information related to the following unaudited pro forma adjustments related to these acquisitions:

additional interest expense associated with the financing obtained by the Company in connection with the various acquisitions;

•

the exclusion from pro forma earnings in the nine-month period ended September 30, 2012 of the acquisition accounting adjustments on QLT’s, iNova’s, Ortho Dermatologics’, Afexa’s, Probiotica’s, OraPharma’s, University Medical’s, and Atlantis’ inventories that were sold subsequent to the acquisition date of $31.1million, in the aggregate, and the exclusion of $16.7million of acquisition-related costs, in the aggregate, incurred primarily for the J&J North America, QLT, OraPharma, University Medical, Atlantis, Gerot Lannach, and Probiotica acquisitions in the nine-month period ended September 30, 2012, and the inclusion of those amounts in pro forma earnings for the applicable comparative periods; and

•

the exclusion from pro forma earnings in the three-month period ended September 30, 2012 of the acquisition accounting adjustments on QLT’s, iNova’s, Ortho Dermatologics’, Afexa’s, Probiotica’s, OraPharma’s, University Medical’s, and Atlantis’ inventories that were sold subsequent to the acquisition date of $2.9million, and the inclusion of those amounts in pro forma earnings for the applicable comparative periods.

18

VALEANT PHARMACEUTICALS INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular amounts expressed in thousands of U.S. dollars, except per share data)

(Unaudited)

The pro forma earnings also exclude amortization of inventory step-up that arose from the Merger that was recognized in the nine-month period ended September 30, 2011. Such amounts were included in the applicable comparative period for purposes of pro forma financial information.

In addition, all of the above adjustments were adjusted for the applicable tax impact.

4.

ACQUISITIONS AND DISPOSITIONS

Divestitures of IDP-111 and 5-FU

In connection with the acquisition of Dermik, the Company was required by the FTC to divest 1% clindamycin and 5% benzoyl peroxide gel (“IDP-111”), a generic version of BenzaClin®, and 5% fluorouracil cream (“5-FU”), an authorized generic of Efudex®.

On February 3, 2012, the Company sold the IDP-111 and 5-FU products. In the fourth quarter of 2011, the Company recognized $7.9 million and $19.8 million of impairment charges related to the write-down of the carrying values of the IDP-111 and 5-FU intangible assets, respectively, to their estimated fair values, less costs to sell. The adjusted carrying values of $54.4 million and $14.8 million for IDP-111 and 5-FU, respectively, were classified as Assets held for sale on the consolidated balance sheet as of December 31, 2011 and were included within the U.S. Dermatology reporting segment. IDP-111 and 5-FU were considered non-core products with respect to the Company’s business strategy, which contemplates, on an ongoing basis, the selective purchase and sale of products and assets with a focus on core geographies and therapeutic classes. The Company, therefore, considers the sale or the out-license of non-core products to be part of its ongoing major and central operations. Accordingly, proceeds on the sale of non-core products are recognized as alliance revenue, with the associated costs, including the carrying amount of related assets, recorded as cost of alliance revenue. In connection with the sale of the IDP-111 and 5-FU, the Company recognized $66.3 million of cash proceeds as alliance revenue in the first quarter of 2012 and expensed the carrying amounts of the IDP-111 and 5-FU assets of $69.2 million, in the aggregate, as cost of alliance revenue. The cash proceeds from this transaction are classified within investing activities in the consolidated statements of cash flows.

Cloderm®

On March 31, 2011, the Company out-licensed the product rights to Cloderm® Cream, 0.1%, in the U.S. to Promius Pharma LLC, an affiliate of Dr. Reddy’s Laboratories, in exchange for a $36.0 million up-front payment, which was received in early April 2011, and future royalty payments. The Cloderm® product rights intangible asset was recorded at a fair value of $31.8 million as of the Merger Date, and had a remaining unamortized carrying value of $30.7 million at March 31, 2011. Cloderm® was considered a non-core product with respect to the Company’s business strategy. Accordingly, the Company recognized the up-front payment as alliance revenue in the first quarter of 2011 and expensed the carrying amount of the Cloderm® intangible assets as cost of alliance revenue. The cash proceeds from this transaction are classified within investing activities in the consolidated statements of cash flows. The Company recognizes the royalty payments as alliance revenue as they are earned.

Zovirax®

On February 22, 2011 and March 25, 2011, the Company acquired the U.S. and Canadian rights, respectively, to non-ophthalmic topical formulations of Zovirax® from GlaxoSmithKline (“GSK”). Pursuant to the terms of the asset purchase agreements, the Company paid GSK an aggregate amount of $300.0 million in cash for both the U.S. and Canadian rights. The Company had been marketing Zovirax® in the U.S. since January 1, 2002, under a 20-year exclusive distribution agreement with GSK, which distribution agreement terminated following the closing of the U.S. transaction. The Company has entered into new supply agreements and new trademark license agreements with GSK with respect to the U.S. and Canadian territories.

This acquisition was accounted for as a purchase of identifiable intangible assets. Accordingly, the purchase price (including costs of acquisition) was allocated to the product brand intangible asset, with an estimated weighted-average useful life of 11 years. In addition, the Company reclassified the $91.4 million unamortized carrying amount of the original exclusive distribution agreement from product rights to the product brand intangible asset, to be amortized

19

VALEANT PHARMACEUTICALS INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular amounts expressed in thousands of U.S. dollars, except per share data)

(Unaudited)

over the same 11-year estimated useful life.

5.

COLLABORATION AGREEMENT

In October 2008, Valeant closed the worldwide License and Collaboration Agreement (the “Collaboration Agreement”) with GSK to develop and commercialize a first-in-class neuronal potassium channel opener for treatment of adult epilepsy patients with refractory partial onset seizures and its backup compounds, with a generic name of ezogabine in the U.S. and retigabine in all other countries. Pursuant to the terms of the Collaboration Agreement, Valeant granted co-development rights and worldwide commercialization rights to GSK.

In March 2011, the European Commission granted marketing authorization for Trobalt® (retigabine) as an adjunctive treatment of partial onset seizures, with or without secondary generalization in adults aged 18 years and above with epilepsy. In June 2011, the U.S. Food and Drug Administration (“FDA”) approved the New Drug Application for Potiga™ (ezogabine) tablets as adjunctive treatment of partial-onset seizures in patients aged 18 years and older; however, the FDA recommended that ezogabine be scheduled as a controlled substance under the Controlled Substances Act prior to the marketing or launch of Potiga™. In December 2011, ezogabine/retigabine received scheduling as a controlled substance, which triggered the commencement of amortization.

In connection with the first sale of Potiga™ in the U.S. (which occurred in April 2012), GSK paid the Company a $45.0 million milestone payment, and the Company will share up to 50% of the net profits from the sale of Potiga™. In addition, in connection with the first sale of Trobalt® by GSK in the European Union (which occurred in May 2011), GSK paid the Company a $40.0 million milestone payment and will pay up to a 20% royalty on net sales of the product. As substantive uncertainty existed at the inception of the Collaboration Agreement as to whether the milestones would be achieved because of the uncertainty involved with obtaining regulatory approval, no amounts were previously recognized for these potential milestone payments. The milestone payments (1) relate solely to past performance of the Company, (2) are reasonable relative to the other deliverables and payment terms within the Collaboration Agreement, and (3) are commensurate with the Company’s efforts in collaboration with GSK to achieve the milestone events and the increase in value of ezogabine/retigabine. Accordingly, the milestones are considered substantive, and the milestone payments are being recognized by the Company as alliance and royalty revenue upon achievement. In the second quarter of 2012 and 2011, the Company recorded $45.0 million and $40.0 million of milestone payments from GSK in connection with the launches of Potiga™ and Trobalt®, respectively.

6.

RESTRUCTURING, INTEGRATION AND OTHER COSTS

The Company has completed measures to integrate the operations of Biovail and Valeant, capture operating synergies and generate cost savings across the Company. In connection with these cost-rationalization and integration initiatives, the Company has incurred costs including: employee termination costs (including related share-based payments) payable to approximately 500 employees of Biovail and Valeant who were terminated as a result of the Merger; IPR&D termination costs related to the transfer to other parties of product-development programs that did not align with the Company’s research and development model; costs to consolidate or close facilities and relocate employees, asset impairments charges to write down property, plant and equipment to fair value; and contract termination and lease cancellation costs.

The following table summarizes the major components of costs incurred in connection with these initiatives through September 30, 2012:

20

VALEANT PHARMACEUTICALS INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular amounts expressed in thousands of U.S. dollars, except per share data)

In addition to costs associated with the Company’s Merger-related initiatives, in the nine-month period ended September 30, 2012, the Company incurred an additional $121.0million of other restructuring, integration-related and other costs, including (i) $46.6 million of integration consulting, duplicate labor, transition service, and other, (ii) $44.8 million of severance costs, (iii) $14.9 million of facility closure costs and (iv) $14.7 million of other costs, including non-personnel manufacturing integration costs. The Company also made payments of $107.7 million during the nine-month period ended September 30, 2012. These costs were primarily related to the acquisitions of Dermik, iNova, Sanitas, Ortho Dermatologics, OraPharma, Afexa, PharmaSwiss, and a U.S. restructuring focused primarily on a reduction in the prescription dermatology field force, the global consolidation of the Company’s manufacturing facilities, and systems integration initiatives.

7.

FAIR VALUE MEASUREMENTS

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following fair value hierarchy table presents the components of the Company’s financial assets and liabilities measured at fair value as of September 30, 2012 and December 31, 2011:

21

VALEANT PHARMACEUTICALS INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular amounts expressed in thousands of U.S. dollars, except per share data)

(Unaudited)

As of September 30, 2012

As of December 31, 2011

Carrying

Value

Quoted

Prices

in Active

Markets for

Identical

Assets

(Level 1)

Significant

Other

Observable

Inputs

(Level 2)

Significant

Unobservable

Inputs

(Level 3)

Carrying

Value

Quoted

Prices

in Active

Markets for

Identical

Assets

(Level 1)

Significant

Other

Observable

Inputs

(Level 2)

Significant

Unobservable

Inputs

(Level 3)

Assets:

Money market funds

$

8,047

$

8,047

$

—

$

—

$

27,711

$

27,711

$

—

$

—

Available-for-sale equity securities

—

—

—

—

3,364

3,364

—

—

Available-for-sale debt securities:

Corporate bonds

—

—

—

—

2,974

2,974

—

—

Total financial assets

$

8,047

$

8,047

$

—

$

—

$

34,049

$

34,049

$

—

$

—

Cash equivalents

$

8,047

$

8,047

$

—

$

—

$

27,711

$

27,711

$

—

$

—

Marketable securities

—

—

—

—

6,338

6,338

—

—

Total financial assets

$

8,047

$

8,047

$

—

$

—

$

34,049

$

34,049

$

—

$

—

Liabilities:

Acquisition-related contingent consideration

$

(505,235

)

$

—

$

—

$

(505,235

)

$

(420,084

)

$

—

$

—

$

(420,084

)

Fair value measurements are estimated based on valuation techniques and inputs categorized as follows:

Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

•

Level 3 — Unobservable inputs that are supported by little or no market activity and that are financial instruments whose values are determined using discounted cash flow methodologies, pricing models, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.

If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

There were no transfers between Level 1 and Level 2 during the nine-month period ended September 30, 2012.

The fair value measurement of contingent consideration obligations arising from business combinations is determined using unobservable (Level 3) inputs. These inputs include (i) the estimated amount and timing of projected cash flows; (ii) the probability of the achievement of the factor(s) on which the contingency is based; and (iii) the risk-adjusted discount rate used to present value the probability-weighted cash flows. Significant increases (decreases) in any of those inputs in isolation could result in a significantly lower (higher) fair value measurement.

The following table presents a reconciliation of contingent consideration obligations measured on a recurring basis using significant unobservable inputs (Level 3) for the nine-month period ended September 30, 2012:

Balance,

January 1,

2012

Issuances(a)

Payments(b)

Net

unrealized

Loss (c)

Foreign

Exchange(d)

Transfers

Into

Level 3

Transfers

Out of

Level 3

Balance,

September 30,

2012

Acquisition-related contingent consideration

$

(420,084

)

$

(143,285

)

$

81,294

$

(23,198

)

$

38

$

—

$

—

$

(505,235

)

________________________

22

VALEANT PHARMACEUTICALS INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular amounts expressed in thousands of U.S. dollars, except per share data)

(Unaudited)

(a)

Relates primarily to the OraPharma, Gerot Lannach, QLT, Atlantis and University Medical acquisitions as described above in note 3.

(b)

Relates primarily to payments of acquisition-related contingent consideration related to the Elidel®/Xerese® license agreement entered into in June 2011 and the PharmaSwiss acquisition.

(c)

Recognized as Acquisition-related contingent consideration in the consolidated statements of income (loss). The balance is primarily driven by fair value adjustments to reflect accretion for the time value of money of $19.5 million related to the Elidel®/Xerese® license agreement and $6.2million related to the iNova acquisition described above in note 3. These charges were partially offset by a gain of $4.4 million related to a shift in timing which impacted the revenue assumptions associated with potential milestone payments for the A007 (Lacrisert®) development program.

(d)

Included in Foreign exchange and other in the consolidated statements of income (loss).

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

There were no significant assets or liabilities that were re-measured at fair value on a non-recurring basis subsequent to initial recognition in the nine-month period ended September 30, 2012.

8.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table summarizes the estimated fair values of the Company’s financial instruments as of September 30, 2012 and December 31, 2011:

As of September 30, 2012

As of December 31, 2011

Carrying

Value

Fair

Value

Carrying

Value

Fair

Value

Cash equivalents

$

8,047

$

8,047

$

27,711

$

27,711

Marketable securities

—

—

6,338

6,338

Long-term debt (as described in note 11)(a)

(7,630,246

)

(8,125,088

)

(6,651,011

)

(6,732,568

)

__________________________

(a)

Fair value measurement of long-term debt was estimated using the quoted market prices for the same or similar issues and other pertinent information available to management.

The following table summarizes the Company’s marketable securities by major security type as of September 30, 2012 and December 31, 2011: